Dear Anjali, very interesting Question.
If you are investing in a mutual fund scheme with a lower NAV thinking it to be a better ‘deal’ than buying a fund with higher NAV, think again! Let’s say, you invest Rs 10,000 each in Scheme A (an NFO with an NAV of Rs 10) and Scheme B (an existing scheme with a NAV of Rs 20). In doing so, you hold 1000 Units of Scheme A and 500 units of Scheme B. Now, assuming both schemes have invested their entire corpus in just one stock, which is currently quoting at Rs 100, let us look at the fund value if there is an appreciation in NAV. If that stock appreciates by 10%, the NAV of the two schemes will also rise by 10%, to Rs 11 and 22, respectively. In both cases, the value of your investment increases to Rs 11,000—an identical gain of 10%.
The two variants of every mutual fund scheme are: Regular plan and direct plan
A regular mutual fund plan is one in which you invest in a mutual fund scheme through an intermediary e.g., distributors or agent. These intermediaries guide you in the process of mutual fund investing & offer expert guidance
In a direct plan, you purchase mutual funds directly from the AMC or fund house. Although direct plans give higher returns than their regular plan counterparts, investors must have a thorough understanding of different mutual fund schemes and do not need any assistance.
If you are planning to switch from a regular plan to a direct plan, there are three factors that should be worth your consideration.
1. Lock-in period
Only after the lock-in period of the regular plan has ended, can you switch to its direct plan. Equity-linked savings schemes (ELSS) have a mandatory lock-in period of three years. Certain solution-oriented schemes like retirement and children-specific funds may have a lock-in period of up to five years during which the switching cannot be made.
The investments that are made via SIPs, the lock-in period is calculated from the date of each instalment separately. Whereas SIP in an ELSS fund (with three-year lock-in) in September 2019 will be free of the lock-in in September 2022. Thus, each SIP instalment has to complete three years before it is free of the lock-in period.
2. Exit load
An exit load can be a certain percentage of the NAV that is deducted at the time of redemption/switching.
When you switch to the direct plan, it is considered a new purchase and the new exit load tenure will begin from the date of the investment. So, ensure that redeeming your funds does not attract an exit load.
3. Taxation
When you switch from a regular plan to a direct plan, redeeming units of a regular mutual fund scheme will attract capital gains tax. Understand how your mutual fund gains are taxed. Do keep this in mind this aspect, to avoid unnecessary tax outflows
Dear Madam, you have very interesting question. Just like you , many of the investors go for solution oriented funds to meet specific long term objectives.Most of the MF advisors will also recommend such schemes.
However it is not a good idea.
There are specific solution-oriented mutual fund schemes to save towards goals such as children education or one’ retirement. Such schemes, typically, have lock-in periods and invest in both equities and debt in varying proportions. In reality, opting for large-cap and mid-cap schemes may prove to be more beneficial than routing investments in solution-oriented funds, which are less flexible and carry lower potential for high returns.
Good Question. It appears that you have done proper planning. For SWP, many analysts suggest SBI Equity Hybrid . However We believe ICICI Pru. Equity & Debt fund has strong performance for the period of 1 years and also for 3 years and you can go for it.
If your current needs are satisfied with Bank FD interest, then do invest SWP receipts in SIP for your Grand children.
No Madam, Mutual funds meet needs for different time frames.
You can make use of mutual funds for meeting your short-medium-long term goals. For goals which are to be met within three years there are short term funds, liquid funds and several other debt funds where you can park funds for a shorter duration. Similarly, hybrid funds with exposure to both equity and debt come handy for medium-term goals. For goals which are at least seven years away, opt for equity funds. Based on your needs, time horizon and risk appetite, you can pick any type of mutual fund scheme.
Nice Question and we are sure our guidance will also be very useful to you and many other readers also.
SWP stands for systematic withdrawal plan. Under SWP, if you invest lump sum in a mutual fund, you can set an amount you’ll withdraw regularly and the frequency at which you’ll withdraw. In simple words, let’s say you invested in HDFC Top 200 Fund an amount of Rs 1 lakh for a year. Let’s assume that you decided to withdraw an amount of Rs 10000 per month.
SWP in Mutual Fund, or Systematic Withdrawal Plan, is a mutual fund investment strategy that allows participants to withdraw preset amounts from their current assets at regular intervals. Withdrawals may be made on a monthly, quarterly, semi-annual, or annual basis, depending on the preferences of yours. It guarantees a consistent cash flow for your income requirements.
SWP in Mutual Fund is opposite to Systematic Investment Plan (SIP). The latter regularly transfers a predetermined sum from your bank account to the mutual fund. At the same time, the former reverses the transaction flow. SWP is an excellent instrument for investors seeking consistent cash flows to pay costs.
The Basics of SWP :
An SWP in Mutual Fund enables you to remove a predefined amount from your mutual fund holdings regularly. When an investor chooses an SWP, he gradually withdraws his own money from the continuing investment by redeeming particular mutual fund units.
Simply expressed, a portion of your mutual fund units will be sold regularly to meet the dividend amount you choose. If no time term is specified for the SWP, payments will continue indefinitely.
You will get 10,000 units of that plan if you invest Rs 1 lakh in a fund with an NAV of Rs 10.
The fund will sell Rs 1000 units if you withdraw Rs 1000 each month. Assume that you begin the SWP in Mutual Fund after a year and that the NAV on the day of withdrawal is Rs 20.
As a result, the fund will sell 50 of your units and pay you Rs. 1000. This mechanism reduces the total number of things in your inventory to 9,950.
Suppose the fund’s NAV hits Rs 25 on the following dividend day. In that case, it will sell 40 units to meet the Rs 1000 distribution, reducing your total number to 9,910 units.
Let us investigate this further. Assume you established a 5-year SWP in Mutual Fund for Rs 1000 on a Rs 1 lakh lump sum investment in an equity mutual fund.
Assume the projected rate of return is 10%. After 5 years (60 months), you would get a total dividend of Rs 60,000, with your investment remaining at Rs 84,490. Investors maintain regular monthly cash flow by redeeming units while the remaining units rise according to the market price.
Key Takeaways
SWP in Mutual Fund features should be applied after a few years, say 5-7 years if one is more financially organised, since this period improves capital appreciation. A greater amount of consistent cash flows is preferred.
Furthermore, SIP investments may be supplemented using the SWP in Mutual Fund option. Suppose you have been saving via an SIP until retirement and no longer wish to invest. In that case, you might think about cancelling the SIP but not completely redeeming your contributions. Rather, SWP in Mutual Fund is the best way to get the advantages of a huge corpus. This technique will act as a regular monthly flow and more like a pension for you. You will be able to meet your needs for a much longer period since the corpus balance will stay invested and grow.
It’s important to note that, regardless of the SWP, you may always redeem more.
Word to Remember
Target Investment Plan (TIP): When it comes to mutual funds, there is another intriguing investing choice. Assume you have a certain objective in mind for which you wish to save. You have a good idea of how much it will cost and how long it will take. You may then determine how much to invest in mutual funds via SIPs based on this.
How to pick the Best Systematic Transfer Plan
Choosing the finest SWP in Mutual Fund plan is not the same as selecting the greatest mutual fund for investing; nonetheless, they are not that dissimilar. As a result, the topic of how to choose the greatest SWP plan should truly be how to choose the best mutual fund that suits your risk tolerance, objectives, financial situation, and requirements. It also depends on when you want to use SWP in Mutual Fund.
Did you Know?
When appropriately designed, SWP in Mutual Fund enables you to customise the flow of money at pre-defined periods and quantities. Retirees have access to liquidity (the capacity to access money invested in mutual fund schemes) and a consistent monthly income that is not affected by market movements.
Taxation on SWP for Monthly Income
The regular redemption of units using the SWP function is taxed, depending upon the period of holding ( eg long term or short term)
So yes, for your retirement planning, SWP can be very useful.
Good Question. Divide your investment amount in 2 or 3 portions and invest each portion in large cap, midcap and small cap fund and then select one good performing fund in each category. From our Scoreboard, you can select best performing fund for each category.
SIPs has been advantageous for investors.
Beginners in the field of investing and people who ever even thought of investing must have come across the term ‘SIP’. This term is so popular that it has over 1.3 lakh average monthly searches on Google.
So what is an SIP and how do SIPs in mutual funds work? We will explain you in some detail.
The full form of an SIP is systematic investment plan. Chanakya always insists on the importance of investing regularly and staggering your investments in equities.
Investing in mutual funds through the SIP route helps investors to average their cost of investments. Also, it helps in inculcating a habit of investing as each month, a portion of your salary/income is deducted from your account and invested. It also goes well with your money cycle – you earn every month, you spend every month and you invest every month.
An investor can choose a particular fund to invest in and set a particular amount that shall be deducted from the bank account on a specific date each month.
The investors have the option to choose the tenure of the SIPs while enrolling. What remains noteworthy is that each fund has a mandate of minimum number of instalments to be paid while enrolling for an SIP. This is generally six months for majority of funds.
Let us explain, How do SIPs work?
When an investor enrols for an SIP, a fixed amount is deducted from their bank account at a specified date each month. From this money, the units of the funds are purchased at the applicable NAV (net asset value) which then earn returns based on the portfolio of stocks that the funds hold. In case your SIP instalment is due on the days when the market is down, you are able to purchase more units of the fund. Likewise, if the market is on a rise, you buy lesser units. Hence, the cost of your investment is averaged out by investing through SIPs. It also helps you avoid capturing the market at a high.
Even when your SIPs stop, your investments continue to move in tandem with the market and the performance of the underlying securities. This continues until you decide to redeem your investments.
The gains on mutual fund investments are taxed only on redemption. One must note that for the purpose of calculating capital gains, the holding period is calculated separately for each unit on the basis of their SIP date. For the same, FIFO (first in first out) method is followed. As per this method, the units purchased first are deemed to be sold first.
For SIPs in equity funds, for each instalment that is held for more than 12 months, the capital gains beyond Rs 1 lakh are taxed at 10 per cent. For the ones sold within a year, they are taxed at 15 per cent.
STP can be a good way to mitigate market risks, help cap losses and increase investors’ portfolio returns in the long term. The period of the STP will depend on the investor’s financial goals. However, investors should ideally go for a longer-duration STP into an equity scheme as it would give higher returns in the long run if invested systematically.
How to choose STP ?
Asset management companies offer various types of STPs such as capital appreciation, variable and fixed. In capital appreciation, only the capital returns generated from the source fund are transferred to the destination fund. This type is gaining popularity as the markets were very volatile, especially since January this year. Alternatively, an investor can set up an STP mandate to book profits regularly from an equity fund and transfer the amount to a debt fund to mitigate the market volatility. It can even work well for retirement planning, where a fixed amount of money can be transferred from an equity fund to a debt fund over a period of time, say five years.
In a variable type, an investor can transfer different amounts from the source fund to the target fund depending on the market volatility. For example, if the net asset value (NAV) of the target fund drops due to market correction, then the amount can be increased. On the other hand, if the NAV gains because of the rise in markets, then the amount of investment can be lowered. In a fixed type, a predefined amount is transferred at the given frequency.
Do understand Tax implications
In case of STP, every transfer from a debt fund will be a redemption and attract capital gains tax. So, a redemption before three years will attract short term capital gains tax at the investor’s marginal rate. If the redemption is done after three years, the long-term capital gains tax will be 20% after indexation. Redemption from equity funds before one year will be taxed at 15%, and redemptions after one year will be taxed at 10% for gains over Rs 1 lakh in a financial year. So, evaluate the tax implications before setting the STP mandate.
In a step-up SIP, the investor can increase the contribution at periodic intervals as these are the best way to invest irrespective of the market conditions.The individuals should be wary about making lumpsum investments & they should look at step-up SIPs to gain from the rupee cost averaging and higher compounded returns in the long run.
Increasing the SIP is a good strategy where one can increase investments at regular intervals without disturbing present finances. It also helps you to target a higher corpus in a planned manner and invest more as your income grows over the years. This can be done in any form, by adding a new SIP or increasing the SIP amount. The idea should be to increase investment in funds that are working well for you from a long term perspective.